The dollar surrendered much of its gains on Monday, cutting short the recovery from its worst month in a decade on employment anxiety stirred by ISM data and concerns about a permanently more dovish Fed policy shift.
Though ISM July manufacturing mostly beat expectations, the employment index nL1N2F50TL came in at a still-contracting 44.3, below forecasts for 48.3.
Adding to the market's dollar apprehension, the WSJ reported that the Fed was considering a shift away from its policy of pre-emptive moves to protect its inflation targets and toward an average inflation target.
Such a move would indicate lower for longer rates even amid higher inflation, a risk that five-year TIPS at -1.25% are clearly hedging against.
EUR/USD rebounded off the day's low of 1.1695 near the 10-day moving average, after earlier retreating from Friday’s two-year high of 1.1908 on EBS as the U.S. market extended the previous session's short-dollar position squaring.
The initial EUR/USD pullback followed CFTC data showing record net spec long IMM euro positions, which could become fuel for more profit-taking if this week’s data fails to revive the uptrend.
The dollar index hit resistance at 93.99, two ticks below last week’s high.
A close above 94.01 would enhance upside prospects, first to March’s 94.63 early pandemic nadir.
But, the ISM data stuck in the market’s craw after poor jobless claims data nAPN0G1IYW and Congress's failure to extend coronavirus relief benefits to jobless Americans nL1N2F50O6 -- and ahead of Friday’s non-farm payrolls report.
USD/JPY’s recovery, helped overnight by M&A news, stalled shy of the mid-July low, 21-DMA and weekly kijun at 106.63-70.
Previous oversold daily RSIs returned to neutral readings and 10-year Treasury-JGB yields spreads remained near 40-year lows.
Other than March’s two-days below 104, dips into the 104.00s since 2018 have been good buying opportunities, but with yield spreads so low, USD/JPY rebounds are likely to be less enduring.
Sterling fell back slightly after Friday’s high stopped just below March’s pre-pandemic peak, though it showed resilience versus the euro for a fifth session, with little serious concern about the BoE taking rates negative soon after recent above-forecast UK data.
Hi-beta and emerging market currencies suffered bigger setbacks against the dollar.
Pandemic restrictions in Melbourne and soft housing data weighed on the aussie early, but it recovered in U.S. trading ahead of Tuesday’s RBA, which may lean more dovish but probably avoid policy changes.
Oil and copper gains came on tighter supply outlooks.
Gold and silver ebbed as the dollar recovered along with Treasury yields.
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